The 3% of American gold bugs is growing in number. Asians are already
all in. This can only mean higher prices, as the sleepy-eyed masses
finally wake up. It will take time, but markets follow thermodynamic
laws. Those who studied Physics understand entropy:

entropy - a process of degradation or running down or a trend to disorder

For those who remember chemistry, the boiling point of
water is 100 degrees Celsius. Things get really hot at 99.9 Celsius,
even if they appear calm on the surface. But once 100.0 Celsius is
breached, all hell breaks loose.

Gold and silver will reach their tipping point, or critical mass,
when the masses figure out they've been duped by a paper ponzi scheme.
At that tipping point, precious metals will reach their escape velocity,
much like a rocket escapes earth's atmosphere and shoots to the moon
(to borrow another Physics metaphor).

This is a must-read interview of a money manager in Hong Kong. He's an ex-Goldmanite, a former status quo guy who is obviously blowing the whistle on re-hypothecation in the physical gold markets. Unlike London or New York, Hong Kong is mostly a physical gold market, not a paper exchange. Hong Kong is the pathway for physical gold to enter mainland China, who is already the world's largest producer of gold. Between their prodigious extraction and their voracious imports of gold, China has surpassed India as the world's largest consumer of physical gold.

Kevin Wides differentiates between the "Smart Money", "Institutional Investors", and "Public" for the different stages in a mania bubble, namely the Stealth Phase, the Awareness Phase, the Mania Phase, and the Blow Off Phase.

My labels are less polite for these group of investors: the Smart Money, the Big Money, and the Dumb Money.

This is rich: those benefiting the most from central banks' easy money policies, fear those same policies of inducing "systemic risk". When the world's wealthiest and most powerful are worried, it's time for Joe Six-Pack to worry.

Any preconceptions of Fed omnipotence just circled the drain. Instead of acting like prudent central bankers, they merely thought and acted like hedge fund managers gone wrong, while the commercial bankers they should have reigned in before the financial crisis were going hog wild. Fisher appears to have been the only sane Fed governor.http://www.zerohedge.com/news/2013-01-23/art-cashin-only-sane-voice-fed

Japan's bond market is on the brink of collapse. Yes, that's been a popular prognostication for over a decade now, but the fiscal math is becoming increasingly unsustainable. So we are early, but we will be proven right.

Why is it that every financial scandal, bubble bursting, allegations of fraud or manipulation, always have Lawrence Summers' name attached to it? After all, he's supposed to be the genius PhD economist from Harvard. Yet, here is curriculum vitae:

1) Summers was part of the triumvirate of Robert Robin and Alan Greenspan who convinced President Clinton to deregulate the financial services industry--against the advice of Brooksley Born who was concerned about the over-leveraging of global financial markets. Clinton admitted it was one of the biggest mistakes of his Presidency--that, and the repeal of the Glass-Steagall Act under his Administration. Lo and behold, global financial and credit markets did collapse in 2008 from banking over-leverage and plummeting collateral values.

2) Summers dismissed pleas from the Winklevoss twins in their case against Mark Zuckerberg's alleged theft of the Facebook business model. He arrogantly and admittedly viewed the matter as insignificant.

3) Harvard's endowment fund, the largest among universities, plummeted under his watch.

4) He has repeatedly confirmed the creditworthiness of the US Treasury, despite its credit ratings downgrades and unsustainable debts and deficits.

5) He has repeatedly defended the USDollar's store of value, despite its sinking value relative to other foreign exchange currencies, and especially relative to gold.

6) As US Treasury Secretary, and head of the Exchange Stabilization Fund, he oversaw the surreptitious sales, swaps, and leasing out of the Treasury's gold reserves at rock-bottom pricing.

In summary, he
1) missed the biggest financial bubble in 80 years,
2) missed the significance of Facebook in our every day lives,
3) had Harvard's endowment long on equities, when they should have been hedged,
4) he continues to deny the deterioration of US Treasury finances,
5) he continues to deny the USDollars' plummeting purchasing power,
6) he sold at clearance prices the US Treasury's gold reserves.

Aside from his arrogance, exactly how does Summers continue to hoodwink financial experts, the media, government bureaucrats, and academia into believing his genius? He's about as wrong-headed as a dyslexic fortune-teller.

Stock market bulls and war-mongers will use this as "good news" and boost equities short-term, with the thought that it will be good for a "recovering global economy." Which, of course, will only blow the bubble up even more before the inevitable burst.
It's reminiscent of the real estate bulls at the turn of the century declaring desert properties in America's sun belt would perpetually rise in prices...because well, they said so.

It's 44 pages long, but you might want to at least skim it because it's coming from advisers to some of the biggest international lending institutions, central banks, policy-makers, and sovereign wealth funds.This is what our global financial system will look like going forward.

Thursday, January 17, 2013

Authorized Purchasers,The United States Mint has temporarily sold out of 2013 American Eagle Silver Bullion coins.
As a result, sales are suspended until we can build up an inventory of
these coins. Sales will resume on or about the week of January 28,
2013, via the allocation process.Please feel free to call us if you have any questions.Regards,Jack A. SzczerbanBranch Chief, Precious Metals GroupDepartment of the TreasuryUnited States Mint

The Chinese are hedging their gargantuan dollar exposure. By lending out their huge dollar reserves, they will effectively devalue the dollar, while using said dollars to accumulate assets to counterbalance dollar devaluation.

And finally, Germany's plans to repatriate their gold hits the US press wires. Remember folks: I blogged about it last year. Now that this action by the Bundesbank is reaching more mainstream media outlets, expect more volatility on the price of gold as cohorts from both sides of the issue continue this battleground issue: do central bank and sovereign gold holdings really exist in the Treasury vaults in New York and London as claimed? And even if they do exist, are their multiple legal claims against said gold bars? Because if there are multiple claims:

1) the US Treasury and Bank of England has been running an illegal Ponzi scheme all those years,
2) claimants will find they should have repatriated their gold sooner than later,
3) with fractional reserve gold holdings, possession becomes 100% ownership.

In other words, those that didn't repatriate their rightful gold holdings home will be ASSED OUT.

The status quo will try to refute the legitimacy of the Bundesbank's concerns about the potential for re-hypothecated gold. If so, the German public should demand a public, independent audit of their national gold reserves.

The subprime mortgage-backed securities scandal (i.e. fraud) took down many unsuspecting investors, many of them sophisticated who are not your garden-variety Joe Six-Pack retail investor. One was Leonard Blanatvik, who sued JPMorgan in 2009 for deceptively putting his fund at risk by stuffing it full of toxic assets. Defendants at JPMorgan should be worried for two reasons:

1) Blanatvik is a billionaire, worth some $15 billion. He is not your average day trader living in his mom's basement. The man has clout and he will use it, irrespective of the outcome of the lawsuit.
2) Blavatnik is a Russian billionaire. Russian billionaires didn't get where they got by allowing others to defraud them--with impunity. Heads will roll--and let's hope I'm not being literal. Maybe I've seen too many Hollywood movies, but these guys normally have bodyguards surrounding them, which means so should those who cross them.

All kidding aside, this case illustrates the depth of the rot on Wall Street. It's one thing for a too-big-to-fail bank like JPMorgan to rip off its run of the mill clients on Main Street. It's a another proposition when the wronged investor is a billionaire whale the size of Blanatvik. He won't just go away after JPMorgan tries to wash its hands of any wrongdoing and receives a customary wrist slap of a fine from the government. There will be blood.

“I don’t think the action in the gold and silver
markets is reacting or based on reality. For both gold and silver, what
inventories are available are rapidly being consumed. We are still
seeing games being played in the paper market, but in the meantime those
inventories are shrinking rapidly.

The day will come, an inflection point, when there isn’t enough
physical metal left, and that is when prices are going to rise
exponentially. Right now the fundamentals are incredibly supportive and
the sentiment is extremely negative.

The day will come, an inflection point, when there isn’t enough
physical metal left, and that is when prices are going to rise
exponentially. Right now the fundamentals are incredibly supportive and
the sentiment is extremely negative.

If we take a look at silver specifically,
it’s an absolute layup for multiples of the current price. I find it
funny that people worry about the short-term downside. We are talking
about a buck or two, maybe, and we’re talking about hundreds of dollars
on the upside.

To me it’s just astounding,
looking at the risk/reward ratio, why anybody is the least bit
concerned about what’s going on short-term. Right now there is an
obvious shortage of physical silver developing. I’ve seen nothing to
dispute the fact that physical silver inventories are extremely tight.

Look at what’s going on in Japan. For years the Japanese have run up
debt and they could get away with it because they had big savings, a
trade surplus, and competitive industries. But now everything is
falling apart for them.

Prime Minister Abe and his new Finance
Minister Aso have been blatantly outspoken in saying that the only
remedy for the debt is monetary debasement of historic proportions in
order to drive the currency lower. Meanwhile, the rest of the world is
doing the same thing. To me this is just additional fuel to supercharge
the precious metals higher, and in this case it’s overpoweringly strong
because it will mean the Japanese will be moving into gold in a very
big way.

Egon von Greyerz has stated there may be as much as $200 trillion worth of debt
in the world. Superimposed on that is a derivatives pile that if
correctly accounted for would be well over $1 quadrillion of notional
value. When you think about that, it can’t possibly be repaid or even
serviced as we go forward. So the only option is to print more money in
order to give the impression the financial system is holding together.

The reality is we will
continue to see ‘QE to infinity’ as Sinclair said. I mean we seemed to
see a great relief after the fiscal cliff was postponed. They kicked
the can down the road a month and a half, and it just shows how
desperate people are for supposedly good news.

That wasn’t good news at
all. It basically solved nothing, and yet it was greeted with an
enormous amount of relief. It’s ridiculous.

As a Westerner, it really depresses me to think that all of our gold is headed East, and our standard of living is headed South."

I think a substantial portion of everybody’s net worth
should be in physical gold and silver at this point, because they’re the
only financial assets that aren’t simultaneously somebody else’s
liability. There’s no counter-party risk with them, and that’s critical.”

Because one thing the governments are going to be doing, is
creating trillions more dollars, and that’s going to create other
bubbles. So if you’re well positioned, you can capitalize on that, and
make a fortune as the greater depression dawns upon most people.

There is almost certainly going to be a bubble in gold and silver, and a super-bubble in the companies that explore for and mine them. So buy them now.”

“Since 2007, we entered a gigantic hurricane, and from 2008
to early 2010 we were at the leading edge of the storm. For the last
several years we’ve been in the eye of the storm, but we’re going to
come out the trailing edge, and it’s going to be much worse, and much
bigger, and much longer lasting that what we saw back in 2008. So I
think there will be some bargains, but not now.”

“These governments have printed up trillions and
trillions of currency units, not just the US government, but the
Europeans, the Japanese, the Chinese. These trillions of currency units
have really inflated the value of everything, as people look to hide
capital in something that has value. We’re in
the middle of a gigantic bond bubble, they’ve created a bubble in the
bond market that’s bigger than the bubble that was in real estate, and
bigger than the tech bubble in the stock market up until 2001. When the bond bubble that we’re in now deflates, it’s going to be a catastrophe for most people.“

Bottom line according to Doug Casey: We’re
at a quiet moment in the ongoing crisis, and as currencies and bond
bubbles begin to implode, gold, silver, and mining shares may explode to
historical proportions.

This bill won't pass, but expect more versions of it to come up in the future. Research Executive Order 6102 in 1933, signed by FDR. And then Google what he did in 1934. Confiscation and theft are the only two words to describe that bait-and-switch.

So let me get this straight. First they want gun registration and
now precious metal registration? I’m sure the government would only use
such information in our best interests, because as we all know: Your Government Loves You. Sounds reasonable, after all, only “terrorists” buy guns and gold anyway.

Meet the ” Precious Metal Purchasing Act” or SB3341, brought to you by the lovely folks at the Illinois 97th General Assembly:

I had an interesting email exchange with a client (let's call him Gary for now), so I thought I'd post my thoughts on silver, since gold already gets so much coverage. I won't post my future strategies, but here are my current thoughts on the silver play.

The gold-to-silver price ratio is approximately 55 : 1 currently, although I expect it to return
to 16 : 1 as that is the approximate ratio of resources in the ground. In fact, it
may overshoot to 10 : 1 in a raging precious metals bull market, for the following
reasons:

1) pretty much all the gold ever mined is sitting in some vault, somewhere in the world
2) silver is consumed, and rarely recycled
3)
there are very few pure silver mines in the world. Most are by-products of other metals. So if the world economy struggles, marginally profitable mines for
other base metals would shut down, cutting off the supply of silver as well
4) even though the ratio of resources in the ground is 16:1, the ratio of
extraction is lower. In other words, because silver is an
industrial metal, more silver is mined on a relative basis (and needed to keep production lines
humming). Faster depletion rates = bigger shortages down the line =
higher appreciation in prices.
5) because it is an industrial metal with no comparable competitor, demand is inelastic--irrespective of price. For example, if silver is a gating item in the production of Apple IPhones, the manufacturer will pay whatever it takes to keep their production line up. An allocated component (i.e. a shortage) commands much higher price premiums, as the phrase "time is money" becomes intensely more relevant when a vendor (and customer) hears the words "production line down." To the component supplier, it means the parts go to the highest bidder--assuming they can even find any inventory. This refers back to Kyle Bass' comment about "Price will solve everything." Despite gold's greater scarcity, silver's industrial demand dynamics will induce steeper price spikes and volatility during shortages. Silver's monetary role and investment demand as a currency influences its price, also.

In the same scenario, if silver is indeed in the critical path, commodity buyers will pay whatever it takes to manufacture and ship out IPhones and IPads. The end-user market demands it and Apple would demand it. Corporate treasuries of high-tech companies would be well-positioned if they were to keep an inventory of potentially allocated parts, but most by-laws prevent them from parking their money in anything other than short-term US Treasury securities (T-bills, for instance). The other headwind for stacking up inventory is high-tech's sophisticated Just In Time inventory system, which reduces inventory costs. JIT works well--until JIT turns into "Just Short", which would pre-date disaster. I understand the misguided mentality of "risk-less" returns and fiduciary implications, but these corporate treasury strategies will end in tears if a shortage in silver materializes.

Interestingly enough, I visited the UCSB Materials Science group
(part of a cross-functional collaboration between multi-disciplinary
Engineering departments) and one of the post-doctorate researchers said
the Department of Defense gave them a grant to research platinum
replacements (used in catalytic converters), as they obviously thought
there would be a future shortage. I asked him about silver, to which
the scientist replied "oh, no, there is plenty of silver in the world."
In my mind, that triggered an immediate Pavlovian response to buy more silver. Even the brightest minds
will be wrong on this.

6) silver is used in so many applications, it's mind-boggling. It's
due mostly to superior thermal and electrical conductivity, so while cheaper metals could be
used, performance would be compromised. Silver is used in diverse applications such as electronics,
solar panels, batteries, mirrors, optics, autos, antibiotics, disinfectants, and pretty
much every high-tech gadget we use.

7) while gold has a better--if not longer history of being a
monetary metal, silver's paper price is manipulated with more vigor, as it's a
much smaller market. Less capital is required by naked short sellers to suppress silver's price. Hence, the snapback to the upside will be much
greater. It might take tens of billions of dollars on the long side to
squeeze the shorts in gold. But it'll only take a few billion dollars of
physical silver buyers to bankrupt the shorts in silver. See Bear Stearns in 2008. Most believe their wrong-way bet on subprime mortgage-backed securities caused their collapse. I can piece together a case which indicates their precious metals hedging positions on the short side also contributed to their demise. When JP Morgan bought out Bear Stearns for a measly $10/share, assets included Bear Stearns' precious metals book. Mergers and Acquisitions became synonymous with Murders and Executions.

Bottom line: if one is bullish on gold, it might be prudent to be even more bullish on silver.

Thursday, January 10, 2013

Traders have been relying on the Bernanke Put for years since the financial crisis reared its ugly head. Now we have the Warren Buffett guarantee that banks won't implode global financial markets. Both signal the Fed ginning up the printing press. This isn't a bold statement on Buffett's part--he's a big investor in Wells Fargo, Bank of America, and Goldman Sachs. They've been given cheap money (zero interest rate loans), free money (bailouts), and mortgage-related shenanigans have been prosecuted with slaps on the wrists (billion dollar fines). Balance sheets have been recapitalized.

So yeah, their solvency has been restored--as long as one doesn't account for shadow assets mispriced to reflect un-reality. Meanwhile, Buffett's vote of confidence has coincided with the USDollar tanking--while gold and silver rise in tandem. That's the same gold which Buffett has denigrated as worthless, and the same silver that Buffett profited from in the 1990's.

The song "Money For Nothing" by Dire Straits comes to mind.

The old man is talking his book, and that's probably worth several billion in market capitalization right there. The extend and pretend crowd can certainly delay the implosion of the bond market and currency crisis. See Japan.

And I certainly wouldn't bet against the octogenarian. At least not yet.

I've always posited that when one buys gold or silver, one is competing against 3 billion peasants in Asia for said gold and silver. Now it looks like some Americans are finally catching on. More buyers entering the precious metals market means rising demand. In a backdrop where supply isn't growing, "price will take care of itself" - as Kyle Bass correctly stated.

Do not try to time this market. Gold has gone up for 12 consecutive years. Those trying to buy, sell, buy, sell are missing the point--and in doing so, are probably generating tax revenue for Uncle Sam.

I get asked this question often, so this video is a short clip on why you want
to take physical possession of your gold and silver. Paper assets
include the now-ubiquitous exchange-traded funds (ETF) which trade like
stocks. The most common ones are the GLD and SLV for gold and silver,
respectively. Without going into a long-winded discussion on why they
are subject to market manipulation and pose counterparty risk, suffice
it to say that they are not 100% backed by the physical metals (they
openly admit this in their brochures). Clients owning more than 10
million shares will be the only ones able to redeem said shares for
physical delivery, so everyone else would own legal claim to paper and
nothing more, in the event of a run on physical inventory. In other
words, unless you're a billionaire, good luck on getting your gold when
the $hit hits the fun.

Other paper gold assets include COMEX futures, options, and other
over the counter assets, which are highly speculative and volatile.
Physical gold and silver, on the other hand, are the soundest forms of
money--even safer than currencies themselves. Of course, the Fed, the
US Treasury, and bankers would never admit this: they want participants
to have complete faith in the USDollar. While the dollar remains a
viable medium of exchange (for now), historically, it's been a poor
store of value. Hence, we see rising prices on everything we buy, year
after year. A college education used to cost under $1000 annually 30
years ago. Today, that same education costs $20,000 annually.
Inflation has not been kind to tuition, healthcare, food, or energy
prices. Buy precious metals, and you mitigate rising costs.

As for Kyle Bass, here is some background on him. He was one of the
few money managers who bet on the subprime mortgage market
collapsing--before it collapsed. He and his firms' clients made
billions when the real estate market imploded (while everyone else lost
trillions in stocks and real estate). He was featured in Michael Lewis'
best-seller The Big Short, if you want to read about him and other
investors prescient enough to identify the bubbles in real estate and
financial assets, while everybody else was flipping Calfornia real
estate and buying shares in banks and GM.

Bass also serves on the board of UTIMCO, the University of Texas and
Texas A & M endowment fund, which happens to be the 2nd largest
($28 billion under management), next to Harvard . In other words, they
have a lot of capital to invest, both wisely and prudently. He's not
some lunatic fringe blogger bent on the decline of western
civilization. His opinion carries weight on Wall Street--and on Texas
ranches.

A
couple years ago, he initiated UTIMCO's push to convert their GLD
shares into $1 billion worth of solid gold bars--precisely due to
counterparty risk (as in they may have legal claim to gold via a
certificate, but if they don't possess the gold bars, all they own is an
empty paper claim).

While I agree with him in principle, I don't believe UTIMCO went far
enough. Their gold bars do exist, but they are stored in HSBC's
vaults, the custodian for the GLD ETF. There have been some grumblings
of HSBC manipulating GLD shares and physical inventory, as well as
accusations of JPMorgan manipulating the SLV ETF for silver. It's the
ol' fox guarding the hen house syndrome. If I were UTIMCO, I would go
even further, and send a team of Texas Rangers to HSBC's vaults in New
York, repatriate and transport those gold bars back to Austin, Texas.
After all, if/when the $hit does hit the fan, possession is 100%
ownership--irrespective of legal paper claims.

We have seen every major bank being fined for chicanery and
manipulation of markets much bigger than gold and silver (see
robosigning of mortgages, implosion of subprime bonds, and LIBOR
market). To suggest that banks aren't tempted to manipulate the
precious metals sector is completely naive.

Put
simply, buying gold and silver mitigate risk--they are not speculative
trades, unlike what my critics keep droning. In fact, I would turn it
around and insist that those who don't possess precious metals are the
speculators, as they have 100% faith in the fiat dollar, which is by
definition, not backed by anything tangible--except the US Treasury's
ability to tax its citizens and private entities. Even entrenched
Keynesian economists admit this:

“How long can the world’s biggest borrower remain the world’s biggest power?”

- Lawrence Summers, former US Treasury Secretary

And
trust in a fiat paper currency is a speculation that has a 100% track
record of failing over time. The only question is when, not if. This
includes all dollar-denominated assets, whether they be stocks, bonds,
or to a certain extent, even real estate. In other words, gold and
silver aren't just financial assets, or even merely commodities. They
are money. Money that has been good money for 6000 years.

And I end with this oft-quoted quip from JPMorgan himself, the
architect of the Federal Reserve Bank, which has an understandably
antagonistic stance against gold. But in a rare moment of truth,
testified this before Congress:

Do the Fed Chairman and US Treasury Secretary call the shots for the US--or even the global economy? One could make that argument. But given the Fed is a private corporation with European and US banks as shareholders, one could also make the argument that commercial banks run the Fed.

What about the US Treasury? Here is a roster of the Treasury Borrowing Advisory Committee which meets every quarter. The list of players is hardly surprising.

Monday, January 7, 2013

In the interest of keeping an open mind and avoiding blind spots, it's important to remain objective. This author says the bull market in gold is over--after 12 years of rising every year. You be the judge.

Looking at history and contrarian calls at inflection points (tops
and bottoms), often the calls were correct directionally--before they
turned and ended up being completely wrong down the road (hence, the contrarian label). For instance,
Businessweek's infamous cover in August of 1979 declaring "The Death of
Equities" has been declared as the ultimate contrarian call. Equities
were falling out of favor, but lo and behold, the market bottomed in 1982
and the biggest bull market in stocks continued until 2000.

So Businessweek's call for "the death of equities" was correct for 3
years (and contrarians would have lost their shirts going long in
1979). But when it bottomed out in 1982, being short was exactly the
wrong place to be because the huge bull market began then. So it was a good contrarian indicator--albeit, 3 years early.

So could gold peak at some point? Probably, but given the stealthy
bull market of 12 years and running, gold is still scorned and even
hated in most circles. Imagine the analysts and cocktail hour
discussions if the stock of Google went up for 12 consecutive years.
They'd be jumping up and down like Tony Robbins on speed.

In other words, time-wise, this precious metals bull market is
getting long in the tooth. But if you study bull markets at all, the
last mania phase is when most of the nominal gains are made, as prices
enter the parabolic stage. Most of the nominal gains from the 14-year
bull market in gold from 1966 - 1980 were made in the final two years,
when gold leaped from $400 to $850 in only a few months time span, from a
base of $35 in 1971.

If gold and silver do enter the mania phase, I expect gold prices to
peak around $6300 and silver $400, based on previous market bubble peaks,
including the NASDAQ and gold. Cycle theorists would then declare a smashing of prices, and the subsequent cleansing of the global financial systems to sort things out. However, if the dollar collapses in the "Great Reset", then there will be no "peak" in gold
or silver--or any other commodity for that matter, because if the
dollar goes to zero, prices of everything else go to infinity. There
would be no peak as prices of everything would stay perpetually at
infinity, as the old dollars expire worthless.

In that scenario, gold and silver won't be just optimal--they would
be the ONLY money worth having. Sounds improbable, right? Think
again. Back in the early 1980's, Paul Volcker was able to finally reign in
inflation by causing short term interest rates to soar to 23%. It also
logically coincided with the peak in gold prices. The austerity was
very painful to the economy--but also very necessary to clear out the
bad debt. Many went bankrupt. But it was necessary--and achievable for
only one reason: America was the world's biggest creditor at the
time. Which meant a rise in interest rates benefited US Treasury
coffers, as other countries had to pay higher coupon rates.

Today, the opposite is true: the US is the world's biggest borrower in the history of
mankind. We are no longer a creditor--but a debtor on a massive scale.
A rise in interest rates converts our unofficial insolvent status into official bankruptcy.
It would be very similar to a homeowner holding an adjustable rate mortgage--and having the interest rate rise to 23%. Bernanke likes to point out that he can withdraw liquidity anytime he
wants should the economy improve, causing bond yields to rise. No, he cannot.
He cannot stop the spigots of liquidity because the already fragile economic recovery would tank without injections of credit and liquidity, so what makes him so confident
he can not only stem the liquidity injections, but actually reverse
them? The answer is he cannot--he is forced to continue QE'ing because
if he stops the money printing, the music will stop playing and the
economy would collapse.

Structurally, our economy is still built
on quicksand. Our economy is 70% consumer-based, and the consumer is still tapped out and over-indebted. The debt problems are still there--in fact, they are
even bigger. Private sector debt (banks) have merely been transferred
to official government debt (central banks) on a global scale with all
the bailouts. Who will bail out the Fed and other global central
banks? The Fed's balance sheet has exploded over 3 times since the 2008
financial crisis. With additional QE, it will double once again to
$6 trillion. Let me repeat that: in 2008, the Fed's balance sheet was
$900 billion. By the time the Fed is done with QE in 2015, its balance
sheet will be north of $6 trillion.

So Bernanke won't be able to withdraw liquidity and raise interest
rates should inflation accelerate. In fact, the Fed has declared that
they will pin interest rates to zero until at least 2015. My
interpretation is they will have to ATTEMPT to do that into perpetuity,
because the debt problems will not go away--they will only grow due to
compounding. But market forces have a predilection of overwhelming
manipulation by central planners eventually. Market controls never work
in the long run. Something will break, whether it's runaway inflation,
or rising interest rates--or both. Although those forces are normally
countervailing, inflation and rising interest rates have occurred
simultaneously in the past. See 1979 - 1980.

The question is then: will rising bond yields and interest rates
kill the bull market in gold? The answer is yes--eventually, probably
after a lag where both inflation and rates rise in tandem. But can the
Fed afford to have bond yields rise? The answer is no. In fact, the
purpose of QE is to artificially increase demand for US Treasury bonds
in a market where buyers have shunned Treasuries, so the purchasing of
said assets by the Fed can artificially keep bond yields lower than what
a free market would demand.

As long the Fed continues to have an explicit policy of suppressing interest
rates, holding gold is still prudent, as the opportunity cost in a negative, real interest rate (inflation-adjusted) environment is
de minimis. However, even if bond yields at the longer end of the
curve (30-year and 10-year maturities) get away from the Fed, the
intractable outcome is default by the US government, which should make
gold even more attractive for holders. The problem with that scenario
is that the world may not end, but the world as we know it will end.

“They’re not going to tell you that a collapse is coming. You’re
going to have to see it for yourself. The government’s never going to
tell you that it’s going to happen.These guys are
never going to tell you the truth, because they can’t tell you the
truth. Their job is to promote confidence, not to tell you the truth.” - Kyle Bass

It appears the cozy relationships between the credit ratings agencies and the US Treasury are starting to thaw a bit...same with the status quo coordination between the Fed and the IMF, the central banks' central bank. You know things are getting dicey when the powers-that-be interconnectedness is fraying at the edges.

This is a re-post. I agree his scenario is not only possible, but probable. No one knows for sure, but my predicted timeline is 2013 - 2015 for the big reset of our global monetary system to reset. Raoul Pal's timeline is certainly more aggressive.

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Some of our best ideas come to us during the most inopportune times: waking up, in the shower, driving along a country road...my blog is an attempt to capture these epiphanies, whether whimsical or serious in nature. These blogs are heavily weighted toward financial matters and/or innovation (e.g. disruptive technology)--normally boring subject matter. But when sprinkled in with meanderings about human nature, I hope to shed some light on oft-misunderstood topics--without being dogmatic. Enjoy and perhaps learn a thing or two from my moments of clarity.

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